Factoring is a financial service that helps businesses to manage their cash flow by providing an advance against their outstanding receivables. There are several types of factoring arrangements that cater to the specific requirements of different businesses. Some of the common types of factoring are:
- Recourse Factoring: In this type of factoring, the factor assumes the responsibility of collecting the receivables from the customers, but if any invoice remains unpaid, the seller has to buy it back from the factor. In other words, the seller assumes the credit risk associated with the receivables.
- Non-Recourse Factoring: In this type of factoring, the factor takes the responsibility of collecting the receivables and also bears the credit risk associated with them. If any invoice remains unpaid, the factor has to bear the loss.
- Invoice Discounting: Invoice discounting is a type of factoring in which the seller retains the responsibility of collecting the receivables from the customers. The factor provides an advance against the receivables and charges a fee for the service.
- Domestic Factoring: Domestic factoring involves the financing of receivables within a country. The factor provides funding against the receivables of the seller, and the seller is responsible for collecting the payment from the customers.
- International Factoring: International factoring involves the financing of receivables in cross-border transactions. The factor provides funding against the receivables of the seller in foreign currency and also takes the responsibility of collecting the payment from the foreign customers.
- Full-Service Factoring: Full-service factoring is a comprehensive factoring arrangement that covers all aspects of the receivables management process, including credit checks, invoicing, collections, and financing.
- Maturity Factoring: Maturity factoring is a type of factoring in which the factor provides funding against the receivables that have a longer payment cycle, such as installment payments or deferred payment terms.
- Bulk Factoring: Bulk factoring is a type of factoring in which the factor provides funding against a portfolio of receivables rather than individual invoices. This type of factoring is suitable for businesses that have a large volume of small transactions.